Brexit expected to slow down EU economy by 0.2 – 0.5 percentage points

Commissioner Pierre Moscovici presented the Commission’s preliminary assessment of the possible economic impact of the UK referendum on the EU economy.

At a meeting yesterday (11 July) with the Eurogroup, commissioner Moscovici, who is in charge of economic and financial affairs, taxation and customs, said that the initial market reaction affected exchange markets, equity markets and sovereign bond markets.

Before the vote, the Commission had expected a mild slowdown of economic activity following a good performance of the economy in the first quarter of this year.

“We already expected the exceptional tailwinds that have been supporting the euro area economy to weaken. The lift from cheap oil is already waning and the euro’s depreciation has run much of its course,” Moscovici said.

The UK leave vote surprised markets and political uncertainty has increased significantly since then. The longer the uncertainty lasts, the costlier it would be for the economy.

He continued that “It is essential that we see a very important acceleration of the changes underway in the UK, with the arrival of Mrs May (the new British prime minister) on Wednesday. It is essential for both economic and political reasons that we continue calling for a clarification of the situation as soon as possible.”

The British government should notify as soon as possible its intention to leave the EU under article 50. This is a pre-condition before starting any negotiation on its future relationship with the EU, either formal or informal, he said.

Turning to the economic consequences, Moscovici said that the recovery in the euro area appears to remain on track, but it is challenged with increased downside risks.

The situation is still fragile in the euro area, there is still slack in the economy and this will be exacerbated now. Staff from ECFIN (Economic and financial affairs DG) has prepared a first assessment of the near term impact which is close to what the IMF released last week.

“We expect the increased uncertainty to reduce UK GDP by 1 to 2½ percentage points by 2017 compared to the baseline scenario of remaining. In the EU-27 and in the euro area the impact could be between 0.2 and 0.5 percentage points.”

Commissioner Moscovici underlined that this “of course this is not a forecast: it is just a preliminary assessment or analysis. This can be changed if we are capable of limiting uncertainty and delivering the proper policy response, which should be to accelerate the efforts towards a more resilient banking sector, to ensure the right policy mix to stabilise the economy at this current juncture and to live up to the structural commitments to converge to a higher growth path.”

The Brussels Times (Source: European Commission)

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